HAR §16-119.6-3. Definitions

Unless the context indicates otherwise, the definitions in chapter 514B, HRS, apply to this chapter and the following definitions apply to chapter 514B, HRS, and this chapter: 119.6-2 §16-119.6-3 "Asset" means any part of the association property. "Association property" means those parts of a project which an association is obligated to maintain, repair, or replace, including but not limited to: (1) All the common elements of the project, as determined from the project's declaration and the bylaws and any master deeds, restrictive covenants, apartment or unit deeds, apartment or unit leases, or other documents affecting the project; (2) Any real property which is not part of the common elements but which the association either owns or leases for a term of more than one year, such as a manager's apartment acquired by the association after the project was developed; (3) Any personal or movable property owned or leased by the association; (4) Any fixtures owned or leased by the association; (5) Any limited common element expense determined by the board pursuant to section 514B-41 (c), HRS; (6) Any components of association property; and (7) Solar and wind energy devices as provided by and defined in section 514B-140, HRS, and other renewable energy devices. "Association property" does not include any part of the project that is "exempt association property" or which fewer than all unit owners are obligated to maintain, such as units or certain limited common elements. Example: A project's documents state that a deck is a limited common element assigned to less than all the owners. The project's documents also state that the owners of the units to which the deck is appurtenant must pay for the cost of maintaining and repairing the deck. Therefore, the 119.6-3 §16-119.6-3 association need not set aside funds for replacement reserves for the deck. "Budget year" means the association's fiscal year for accounting and budgetary purposes. "Cash flow plan" means the same as defined in section 514B-148, HRS, provided that where an association assesses unit owners to fund one hundred per cent of the estimated replacement reserves using a cash flow plan, the different reserve funding plans that are tested against the anticipated schedule of reserve expenses until a desired funding goal is achieved shall not result in: (1) Disproportionate and unreasonable deferral of funding of the estimated replacement reserves to the last five years of the minimum thirty-year projection period; (2) Each owner in a project not paying a fair share of the short-term and long-term costs of operating the project based on the unit owner's period of ownership; or (3) Circumventing the requirements of section 514B-148(b), HRS, to collect the estimated replacement reserves amount for each part of the property for each year during the minimum thirty-year period to fund fully its replacement reserves requirements for each year during the minimum thirty-year period as determined by a reserve study. "Component" means an individual line item in the reserve study developed or updated in the physical analysis part of the reserve study. "Contingency reserves" means all reserve funds, other than replacement reserves, in an association's reserves accounts, including but not limited to reserves for: (1) Unexpected contingencies or emergencies that in the reasonable judgment of the board may occur; (2) The payment of insurance deductibles or other expenses relating to insurance; 119.6-4 3 6 2 6 §16-119.6-3 (3) Legal expenses and lease renegotiation or fee purchase expenses; (4) Legal or licensed professional services fees relating to the maintenance, repair, or replacement of association property; (5) Additions and improvements to the association property, such as new construction; (6) Late payment or nonpayment of an assessment by any unit owner; and (7) Large infrastructure major repairs that have an estimated remaining life of more than thirty years. Examples include replacement of aging plumbing components and elevators. Notwithstanding the minimum thirty-year projection of an association's future income and expense requirements to fund fully its replacement reserves requirements each year during that thirty-year period, except in an emergency, a board may elect to include in the reserve study the funding of large infrastructure major repairs that have an estimated remaining life of more than thirty years. "Emergency" means the same as "emergency situation" as defined in section 514B-148(h), HRS. A situation requiring an association payment of an unforeseeable extraordinary amount for a utility expense due in part to a utility company's miscalculation of amounts due, unforeseeable increases in insurance premiums, or any other similar unforeseeable situation shall be included in the definition of "emergency situation" as provided by section 514B-148 (h) (2), HRS. "Estimated age" or "effective age" means the estimated useful life of an asset minus its estimated remaining life. "Estimated remaining life" means any period (1) which is shorter than the estimated useful life of an asset, and (2) for which the asset will continue to serve its intended function without requiring capital expenditures or major maintenance. 119.6-5 §16-119.6-3 "Estimated replacement reserves", "reserve fund contribution", or "funding goal" means funds which an association's reserve study indicates must be assessed and collected during a budget year to establish a full replacement reserve for the association by the end of that budget year. "Estimated useful life" means the period a new asset or an existing asset which has been newly restored or refurbished will serve its intended function without requiring capital expenditures or major maintenance. "Exempt association property" means any asset which: (1) At the end of its estimated useful life will require capital expenditures or major maintenance of less than $1,000 or less than 0.1 per cent of the association's annual operating budget, whichever is greater; or (2) Has an estimated remaining life of more than thirty years. Any asset which because of the passage of time ceases to be exempt shall become association property and be subject to the transitional rules stated in section 16-119.6-11. "Full replacement reserve" means reserve funds for an asset equal to the projected capital expenditure or major maintenance required for the asset at the end of its estimated useful life multiplied by a fraction which has as its numerator and denominator the asset's estimated age and estimated useful life, respectively. The total of the full replacement reserves for each asset shall be a full replacement reserve for the association. Example: A roof with an estimated useful life of ten years will cost $100,000 to replace. At the end of its seventh year of life, a full replacement reserve would be $100,000 x 7/10 = $70,000. In the tenth 119.6-6 §16-119.6-3 year of its life, a full replacement reserve would be $100,000 x 10/10 = $100,000. Under a cash flow calculation, one hundred per cent means total funding of all projected annual expenses for a minimum thirty-year period. "Funds", "fund balance", or "reserve funds" mean cash or cash equivalents but excludes any funds that the association has borrowed. No borrowed funds shall be included when calculating whether an association has collected its statutory replacement reserves, including the funding of one hundred per cent of the estimated replacement reserves when using a cash flow plan, provided loans made in accordance with section 16-119.6-12 may be included in "funds", "fund balance", or "reserve funds" only for the first year of the life of the loan. Subsequent year loans shall not be included in "funds" or "reserve funds". "Managing agent" means, for purposes of the good faith exemption provided by section 514B-148(d), HRS, any person carrying out the fiduciary duties as prescribed by section 514B-132(c), HRS, who: (1) Is a managing agent as defined by chapter 514B, HRS, and commission rules and policies relating to managing agents; (2) Meets all legal requirements for managing agents; and (3) Prepares a replacement reserve study and is the managing agent for the association for which the reserve study is prepared, provided if a managing agent is not an "independent reserve study preparer" as defined in section 514B-148, HRS, the replacement reserve study shall be reviewed by an independent reserve study preparer not less than every three years. Any employee of a managing agent who prepares the replacement reserve study shall be deemed a managing agent for purposes of this definition. "Minimum replacement reserve" means fifty per cent of a full replacement reserve or one hundred per 119.6-7 §16-119.6-3 cent of the full replacement reserve when using a cash flow plan. "Reserve study" means a budget planning tool that consists of two parts, a physical analysis and a financial analysis, with both parts updated annually and that identifies the current status of the reserve fund and a stable and equitable funding plan to fund the required "statutory replacement reserves". "Statutory replacement reserves" means fifty per cent of an association's estimated replacement reserves or one hundred per cent of an association's estimated replacement reserves when using a cash flow plan. "Substantially deplete" means any expense for an emergency which reduces the association's replacement reserves and contingency reserves by more than seventy-five per cent. [Eff MAR 26 2026 ] (Auth: HRS §514B-61) (Imp: HRS §§514B-41, 514B-101 (b), 514B-148) §16-119.6-4 Effective date for estab1ishing statutory rep1acement reserves. (a) Each budget year, beginning with the fiscal year after a new association's first annual meeting, the board shall prepare and adopt an annual operating budget that complies with the requirements of section 514B-148(a), HRS, for the following budget year. Each annual operating budget shall include assessments sufficient to fund the association's statutory replacement reserves for the year to which the budget relates. Each budget year, beginning with the first budget year after a new association's first annual meeting, the association shall collect at least its statutory replacement reserves for that budget year. (b) For those projects where the declaration has been recorded but the association has not held its first meeting as provided in section 514B-102, HRS, at least once each calendar year, commencing with the calendar year immediately following the date the first unit's conveyance was recorded, the developer shall, 119.6-8 §16-119.6-5 unless the developer owns one hundred per cent of the units in the project, notify in writing each unit owner of the way replacement reserves for future project maintenance and repairs will be addressed. Such notice shall inform the unit owners in reasonable detail of at least the following: (1) The purpose for establishing replacement reserves; (2) A general summary of the replacement reserve requirements that would apply to associations under chapter 514B, HRS, and this chapter, on such form as the commission may provide; and (3) The amount of replacement reserves being collected as part of the unit owner's maintenance fees, based on a reserve study, or otherwise being funded by the developer and the way those reserves were established. [Eff MAR 2 6 2026 ] (Auth: HRS §514B-61) (Imp: HRS §§514B-lOl(b), 514B-148) §16-119.6-5 Calculation of estimated replacement reserves; reserve study; good faith. (a) The board shall calculate the association's estimated replacement reserves based on a reserve study developed in compliance with this chapter and chapter 514B, HRS, and as required by the commission. (b) The board shall compile a list of the association's assets. If the project's declaration and association's bylaws fail to clearly state whether a part of a project is association property, the board may adopt a resolution allocating responsibility for that part to the association, an individual unit owner, or individual unit owners. The board's resolution shall be based on chapter 514B, HRS, the project's declaration and the association's bylaws, as required by the commission, and any other applicable legal requirements or documents. The resolution shall clearly indicate whether the part in question: (1) Is an asset of the association; 119.6-9 §16-119.6-5 (2) Is the responsibility of an individual owner or individual owners, but fewer than all owners; or (3) Is partly an asset of the association and partly the responsibility of fewer than all owners, such as plumbing or electrical systems. The resolution shall state the basis of the board's decision and shall be effective to determine responsibility for replacement reserves for the part in question upon adoption and until changed by the board or by an amendment to the declaration or bylaws. (c) The board shall determine the estimated useful life of each asset based on at least one of the following: (1) The association's experience with the asset; (2) Any professional or trade publication and any amendments or updates thereto that provide statistics on the estimated useful lives of items similar or comparable to the asset; (3) The estimate of any Hawaii-licensed contractor, architect, engineer, or other design professional or an authorized supplier for the asset for any item similar or comparable to the asset or any materials or services for the asset's upkeep, repair, or replacement; or (4) Any warranty provided by the supplier, installer, manufacturer, or builder of the asset or any services relating to its installation, upkeep, repair, or replacement. (d) The board shall calculate the estimated capital expenditure or major maintenance required for each asset based on at least one of the following adjusted for inflation: (1) The association's experience with expenses relating to the asset; (2) Any professional or trade publication and any amendments or updates thereto that provide statistics on the estimated capital 119.6-10 §16-119.6-5 expenditure or major maintenance, required for the asset or items similar or comparable to the asset; or (3) The estimate of any Hawaii-licensed contractor, architect, engineer, or other design professional or an authorized supplier of the asset of any item similar or comparable to the asset or any materials or services for the asset's installation, upkeep, repair, or replacement. (e) Each budget year, the board shall adjust the amount of the estimated replacement reserves for an asset based on its reserve study and reasonable projections for inflation and interest which may be earned during the estimated useful life of the asset. Adjustments for inflation shall not assume an annual inflation rate less than that of the Honolulu Consumer Price Index for All Urban Consumers for the prior year or its five-year historical average. Adjustments for interest earned shall not exceed the prior year's average interest rate for seven-year United States treasury bills or its five-year historical average. (f) If a board plans to assess less than one hundred per cent of the association's estimated replacement reserves for a budget year, the association's operating budget for that year, the reserve study, and the association's other records shall clearly and prominently indicate: (1) The total amount the association's replacement reserve study indicates will be a full replacement reserve for the association at the end of the current budget year; and (2) The total amount the association will have collected at the end of the current budget year. (g) Any association, unit owner, director, officer, managing agent, or employee of an association who calculates the association's estimated replacement reserves as provided in subsections (b), (c), (d), and (e) shall be deemed to have acted in good faith if the calculations subsequently prove incorrect, provided 119.6-11 §16-119.6-5 that an association, board, director, officer, or managing agent act as fiduciaries as provided in section 4140-149, HRS, and also make the disclosures required by subsection (f) to be deemed to have acted in good faith. For purposes of this section, "in good faith" also includes honesty in fact in the investigation, research, and preparation of the reserve study and calculations of the full and estimated replacement reserves. [Eff MAR 2 6 2026 (Auth: HRS §514B-61) (Imp: HRS §§514B-101 (b), 514B-148) §16-119.6-6 Fund accounting for each part of the association property; use of separate funds for other than stated purpose. (a) Unless the association is funding its reserves through a cash flow plan, an association shall establish at least one reserve account for its projected full replacement reserves. Within the full replacement reserve account, the association shall establish a separate designated fund or funds for each asset for which estimated capital expenditures or major maintenance will exceed $10,000. Projected full replacement reserves for all assets for which estimated capital expenditures or major maintenance will not exceed $10,000 may be aggregated into a single designated fund in the projected full replacement reserve account. (b) For each of the separate designated funds, the association's records for the projected full replacement reserve account shall state: (1) The purpose of each fund or the asset for which it is established; and (2) An amount for the projected full replacement reserves allocated to each fund provided: (A) An association need not comply with paragraph (1) for the single, aggregated fund. Instead, the projected full replacement reserve account records may state the purpose of the fund as "miscellaneous" or 119.6-12 3 6 2 6 §16-119.6-6 similar term and indicate the amount in the aggregated fund. The association shall list the assets for which the aggregated fund is established elsewhere in its records; (B) An association using a cash flow plan shall collect for each budget year the estimated replacement reserves as defined by the reserve study to ensure compliance as provided in the definition of "cash flow" in chapter 514B, HRS, chapters 16-119.1 through 16-119.8, and as required by the commission; and (C) An association using a cash flow plan shall comply with paragraphs (1) and (2) except: (i) The amount of the estimated replacement reserves allocated to each fund may vary for each fiscal year from paragraph (1) and (2) to offset the variable annual expenditures from the reserve fund provided that the offset amount ensures that each unit owner in a project pays a fair share of the short-term and long term costs of operating the project based on the owner's period of ownership and provided that the board includes in the fiscal budget a line item indicating the allocated amount and percentage funded for each component identified by the physical analysis of the reserve study to fund the association's projected full replacement reserves; and (ii) That an association record indicates how the funds are 119.6-13 §16-119.6-6 distributed, expended, and allocated. (c) The board shall use replacement reserves allocated to a fund only for the stated purpose of that fund except: (1) In an emergency or emergency situation, the board may use the replacement reserves in any fund for any legitimate association purpose provided the board passes a resolution containing written findings as to the necessity of using the replacement reserves for other than their designated purpose, the necessity of the expense involved, and why the expense was not or could not have been reasonably foreseen in the budgeting process, and the resolution is distributed to all members of the association; and (2) The board may at any time use up to fifty per cent of the amount in any fund in the full replacement reserves for the stated purpose of any other fund. In such a case, the association records, including but not limited to board meeting minutes, and its annual budget shall indicate the change in use of the fund and the dollar amount of the fund used for another fund. (d) If a board collects less than one hundred per cent of the association's estimated replacement reserves, the association's reserve account records shall clearly indicate how the board has allocated those reserves among each of the separate designated funds. Where an association has met its statutory replacement reserves, the board may fund each of the designated funds by an equal percentage, fund them by varying percentages, or fully fund some and not fund others. Regardless of the option chosen, the reserve account records shall accurately indicate the allocation and amount of funds allocated and adopted by the board qp,m 2~e201tpenditures made from those funds. [Eff Ml-\ ] (Auth: HRS §514B-61) (Imp: HRS §§514B-lOl(b), 514B-148) 119.6-14 3 6 2 6